Chapter 4 Problems: 1, 3, 4, 9, 10, 11, 16, 17

1. Rain spoils the strawberry crop, the price rises from $4 to $6 a box, and the
quantity demanded decreases from 1,000 to 600 boxes a week.
a. Calculate the price elasticity of demand over this price range.
(600-1000)

(-400)

600+1000
2

1600
2

(6 - 4)
6+4
2

= -0.5
0.4

Ep= -1.25

(2)
10
2

Price elasticity = 1.25

b. Describe the demand for strawberries

The price elasticity of demand is greater than 1, so the demand for strawberries
is elastic.
3. The demand schedule for hotel rooms is

a. What happens to total revenue when

the price falls from $400 to $250 a night and from $250 to $200 a night?
When the price is $400, the total revenue is equal to $400 50 rooms, or $20,000
million. When the price is $250, the total revenue is equal to $250 80 rooms, or
$20,000 million. So the total revenue does not change when the price from $400 to
$250 a night.
When the price is $250, the total revenue is equal to $2,000 million. When the price
is $200, the total revenue is equal to $200 100 rooms, or $20,000 million. So the
total revenue does not change when the price falls from $250 to $200 a night.
c. Is the demand for hotel rooms elastic, inelastic, or unit elastic?
Since change in prices does not change the total revenue ($20,000 million) at any
price, the demand is unit elastic at all prices.
4. The figure shows the demand for pens.

a) Calculate the elasticity of demand

price rises from $4 to $6 a pen.
(60-80)
60+80
2

(-20)
140
2

(6-4)

(2)

6+4
2

10
2

when the

= -0.2857
0.4 Ep= -0.71

Price elasticity = 0.71

b) Over what price range is the demand for pens elastic?

Price
Qd
2 - Inelastic
100
4 - Inelastic
80
6
60
8
40
10
20

TR
200
320
360
+ Elastic
320
+ Elastic
200

Price is elastic in price range from 6 to 10

9. If a 12 percent rise in the price of orange juice decreases the quantity of orange
juice demanded by 22 percent and increases the quantity of apple juice demanded
by 14 percent, calculate the
a. Price elasticity of demand for orange juice.
-22%

Qd

12%

Ep= -1.833

The price elasticity of demand is the percentage change in the quantity demanded by
the percentage change in the price. Price elasticity of demand for orange juice 1.83
b. Cross elasticity of demand for apple juice with respect to the price of orange
juice.
14%

Qd

12%

Ep= 1.1666

The cross elasticity of demand is the percentage change in the quantity demanded
of one good divided by the percentage change in the price of another good.

10. When Judys income increased from $130 to $170 a week, she increased her
demand for concert tickets by 15 percent and decreased her demand for bus
rides by 10 percent. Calculate Judys income elasticity of demand for
a. Concert tickets
The change in income is $40 and the average income is $150 so the
percentage change in income equals 26.6 percent. The percentage change in
the quantity demanded equals 15 percent. The income elasticity of demand for
concert tickets equals (15 percent)/(26.6 percent), which is .5639
b) Bus rides.
From part a, the percentage change in income is 26.6 percent. The percentage
change in the quantity demanded is 10 percent. The income elasticity of
demand for bus rides equal (10percent)/(26.6 percent), which is -0.375
11. If a 5 percent rise in the price of sushi increases the quantity of soy sauce
demanded by 2 percent and decreases the quantity of sushi demanded by 1 percent,
calculate the
a. Price elasticity of demand for sushi.
-1%
5%

Qd
P

Ep= -0.2

b) Cross elasticity of demand for soy sauce with respect to the price of sushi.
2%
5%

Qd
P

Ep= 0.4

16. Home Depot Earnings Hammered

a. What does this news clip imply about the income elasticity of demand for bigticket home-improvement items? Would the income elasticity of demand be
greater or less than 1? Explain.
Implies that the income elasticity of demand for big-ticket home-improvement
items is positive, it is a normal good. Usually when people have less extra income
to spend, less people renovate their homes. The income elasticity of demand is
probably greater than 1. Because home remodeling is not essential; it is more of a
bonus. The income elasticity of demand for luxuries is greater than 1.
17. The table sets out the supply schedule of
jeans.
Calculate the elasticity of supply when
a. The price rises from $125 to $135 a pair.
(36-28)

(8)

36+28
2

64
2

(135 - 125)

(10)

= 0.25
0.0769

Ep= 3.2509

135+125
2

260
2

b. The average price is $125 a pair.

The elasticity of supply is 3.25. To find the elasticity at an average price of $125
per pair, I change the price such that $125 is the average pricefor example, a fall
in the price from $245 to $120 per pair. When the price falls from $245 to $120, the
change in the price is $125 and the average price is $182.5. The percentage
change in the price is 68.49 percent. When the price falls from $245 to $120, the
quantity supplied decreases from 124 to 24 jeans. The change in the quantity
supplied is 100 jeans and the average quantity is 74 jeans. The percentage
change in the quantity supplied is 74 percent. The elasticity of supply is the
percentage change in the quantity supplied divided by the percentage change in
the price. The elasticity of supply is 1.080